Russia tightens grip on Central Asian gas exports

PolyaLesova

NEW YORK (MarketWatch) -- In a deal that tightens Russia's control of Central Asian natural-gas exports, Russia, Turkmenistan and Kazakhstan agreed over the weekend to build a new gas pipeline around the Caspian Sea.

The new pipeline will transport gas from Turkmenistan, which has the fifth largest reserves of natural gas in the world, through Kazakhstan to Russia. The agreement is a blow to European and U.S. plans for an alternative energy route that bypasses Russia and transports gas under the Caspian Sea to Azerbaijan and Turkey.

Commenting on the deal Monday, U.S. Energy Secretary Samuel Bodman said: "It would not be good for Europe. It concentrates more natural gas to one supplier." Bodman made the remarks at a press conference in Paris, Dow Jones Newswires reported.

"The deal will disappoint leaders in U.S., Europe, and China who were hoping to get their hands on Turkmen gas supplies," said Lars Rasmussen, analyst at Denmark's Danske Bank, in a research note.

"It is a diplomatic victory for Putin as it shows that the old Soviet states are still loyal to the Kremlin when Turkmenistan decides to sell cheap gas to Russia, as it alternatively could sell it at a much higher cost to the energy-hungry China," Rasmussen said.

Under the new pipeline deal, as of 2009, Russian state-controlled gas monopoly Gazprom
OGZPY, +1.34%
will receive 10 billion cubic meters of Turkmen gas per year for $100 per 1,000 cubic meters, approximately 40% of the price that Gazprom charges consumers in Europe. The pipeline is forecast to transport at least 20 billion cubic meters of gas per year by 2012.

The three countries will sign an official agreement on the new pipeline in September.

"Central Asia will become more crucial in the Russian gas balance going forward," said Al Breach, Russia-based research director at UBS Investment Research, in a note. He projects that imports from that region will amount to 93.2 billion cubic meters by 2014, or 10% of all the gas that Russia consumes, exports or transits.

Tanya Costello, analyst at the Eurasia Group, said that the preliminary agreement on the new pipeline "does not in itself scupper plans for alternative routes such as the E.U. and U.S. backed Trans-Caspian pipeline."

'The deal will disappoint leaders in U.S., Europe, and China who were hoping to get their hands on Turkmen gas supplies.'
Lars Rasmussen, Denmark's Danske Bank

"However, it is a further reminder that Russia maintains a strong upper hand in the competition for Central Asia's gas exports and that alternative routes face considerable hurdles," she said in a research note.

A Trans-Caspian pipeline faces legal, technical and environmental risks, though it is Russian political opposition that would likely break any potential deal, Costello said.

The relationship between Gazprom and Turkmenistan "remains unstable because of questions over Turkmenistan's reserves and production capacity, as well as the potential for pricing disputes," Costello said. "It is unclear whether or not the country, in which the political system and energy sector are highly opaque, has invested sufficiently and introduced adequate technology to meet export commitments."

With a population of about 5 million, mostly Muslim Turkmenistan is about 80% desert. The country is nestled between Iran, Afghanistan and Uzbekistan. Its natural-gas reserves are the third biggest in the former Soviet bloc, behind only Russia's and Kazakhstan's, and the fifth biggest in the world.

The sudden death of its autocratic president, Saparmurad Niyazov, sparked hopes that the country will seek new export routes for its gas. Read more.

The country's new president is Kurbanguly Berdymukhamedov, who came to power in February after a vote that western diplomats said was rigged.

"Although Berdymukhammedov is unlikely to turn away from Russia without credible export alternatives, tense price negotiations are likely," Costello said. "Price disputes have prompted Ashgabat to turn off the gas for several weeks in the past."

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